Musings on Social and Political Policy

Discussions of general areas of public policy

Friday, February 15, 2008

Paying for Your Own Life

Economists and politicians like to make things complicated by tossing in all sorts of extraneous information when discussing public policy. It's really very simple if you just strip away everything but the essentials. When you do you find that you must pay for your own life.

Here's why.

The most obvious reason is that there isn't anyone else. What you earn is what you have available to spend. I will account for the exceptions in a moment. Let's take the simplest example first.

From birth to the age of employment you are living off the earnings of others. For ease of example let's assume this is the first twenty years of life. Then you work from twenty to, say, sixty, or for forty years. Finally you retire and live off the earnings of others for another twenty years. In this simplified model you work for half your life.

Now there are two ways to look at the flow of funds, but they are essentially equivalent. The most common way is to say that you are funded by your parents when young and by other workers when old. While you are working you are funding the young and the old as well. To do this means that half your income goes to the non-productive sectors.

The other way to look at this is to say that society is lending you the money while you are young and you are paying it back when you start working. In addition, while you are working you are lending money to society which is paid back when you are old.

The only difference between the descriptions is that one uses the metaphor of a loan while the other uses the metaphor of inter-generational transfer. Whichever you chose you must still sacrifice half your earnings.

But, you will say what about all the taxes raised from business? This is where the unnecessary complication arises. All taxes paid by businesses get collected ultimately from the final purchaser of the product, it's just buried in the total cost. There is nobody else to pay for things except people, so all taxes are paid by people eventually. So why collect taxes from business? There are many reasons. Some are "sin" taxes meant to influence policy by having the government force firms to charge more for items deemed socially unacceptable. The tax is meant to alter people's behavior. Those who engage in this form of behavior pay more relative to others, but averaged over the whole population things are just as before. Another reason is to disguise the total amount of taxes collected by spreading it over various economic sectors.

Then there is the case of those who can't or won't work. All this means is that my simplified model of 50% non-productive time needs to be modified in the real world. Let's suppose that 5% of the population never works then the other 95% will have to make up the difference so the total taxes paid by workers will be that much higher. In other words you have to pay for your own life plus a bit more. This is just a minor detail.

Another objection is that some make too much money and don't contribute enough to the public funds. This is a distributional issue and doesn't affect the aggregate in general. It is equivalent to having some people pay too much and other pay too little.

There are ways to allow populations as a whole to underpay for their own lives. There are two popular mechanisms in use at present. The first is by stealing from other societies. If we take the output of the labor from elsewhere and underpay them for their work we benefit and have to pay lower taxes (hidden as lower prices) while the workers get back less than they put in as labor. They end up poorer and we underpay the tax.

The other common way is to steal from the future. If we look at the inter-generational transfer metaphor, what it means is that when we are working we underpay the tax and those in the non-working sector get less income than they should. Presently one of these disguised thefts is in college tuition. Parents are supposed to pay for the children's education just as their parents did for them, but instead the children are being required to borrow the funds needed for tuition and pay for their own education once they start to work. The inter-generational agreement has been violated. Cuts in future retirement benefits are a similar way to cheat those who paid for the old when they were working.

If society is stealing from external workers and from the non-working sectors then where is the money going? Once again there are two answers. The first is the same distributional one mentioned before. Those at the top are stealing from those not so well off. They are spending the money which belongs to those who earned it. The transfer is disguised, but can be seen as some combination of under-taxation of the wealthy and overcharging for purchases. A more equitable distribution of wealth would improve the lot of those in the non-working sectors who are at the bottom of the economic heap.

The second has to do with the economic wealth of the entire society compared to the rest of the world. During the heyday of colonialism the theft was explicit. Resources and finished goods were taken from colonies at unfair prices which were maintained by force. The colonies were poorer and the colonial powers enjoyed a higher standard of living because of the implicit tax paid elsewhere. When this source of tax avoidance dries up then the former power suffers a loss in real wealth and becomes poorer. The entire society must do with less, but the sacrifice isn't generally distributed fairly. Those at the top tend not to suffer much while those at the bottom get back less than they put in from taxes.

I claim this is the situation now in the US and is why parents can no longer pay for their children's education, for example. When the music stops the generation that is left without a chair to sit in loses. The music has stopped in the US and will probably do so as well in other developed countries as the emerging states get relatively wealthier.

There is no remedy for this shift in relative wealth for the society as a whole, but there are things that can be done so that the sacrifice is shared more fairly. The steps needed are clear to everyone which is why those who favor the status quo work so hard to make things complicated. What is needed is for the wealthy to become less wealthy and for their "excess" wealth to be spread around so that it minimizes the impact of economic decline on the most vulnerable parts of society. Any combination of inheritance taxes, wealth taxes, progressive income taxes, luxury taxes and abolition of special tax treatment for different classes of earnings (capital gains and dividends, for example) can be made to do the trick. When Willy Sutton was asked why he robbed banks he replied "Because that's where the money is". This simple fact is why the wealthy work so hard to hide this truism.

There is another approach that can be taken to adjust to a declining economic condition. This requires a replacement of the growth-oriented capitalist system with one designed to work within the sustainable capacity of the society. Imagine if you lived on a South Sea island where land was free and you made your hut out of freely available palm branches. Also imagine that you could easily pick all the fruit you needed from the nearby trees and catch all the fish wanted without much effort. If everyone in the society was in a similar situation there would be no need for work. There would be no need for economic growth. All that would be needed is that everyone do a bit more fishing and gathering to provide for the non-productive members of society as well.

If we adjust this utopia to a more realistic circumstance we see that much of the labor now done by people isn't needed. Living in a sustainable fashion requires much less "stuff". There is no need for planned obsolescence or to persuade people to buy things they don't need because their existing possessions are out of fashion. These pressure come from capitalist firms that need to make a profit and grow. In a sustainable society there is no mandate for growth. What is produced is what is needed, not fostered by the artificial stimuli of advertising.

A sustainable society doesn't mean that there can't be technological progress, it just means that the society doesn't steal from other societies or from future generations. For most of the history of humankind people lived in sustainable societies. If they consumed more than the environment could produce they exhausted their resources and starved in the future. If subsistence societies understood this balance than surely advanced societies can adapt this simple rule to the modern age.

I've discussed the issues of moving to a sustainable society in this short essay:Planning For a Steady State (No Growth) Society so I won't go into the details again. The essential point to understand is that all the current discussions about raising personal taxes or changing interest rates or imposing pollution or consumption taxes are all about how to slice the pie up, they don't address the underlying issue that the pie can't expand forever.

I estimate that if the US were to live at a sustainable level the per capita GDP would need to decline to about 25% of the current figure. This would put the US on the same level as Bulgaria. Obviously the people of Bulgaria are managing to function at this level, they just have less "stuff" and less waste. My estimate also doesn't include any technological innovations that may come along which will permit the quality of consumption to improve while making fewer demands on the resources of the earth.

At present it is estimated that the world population is consuming resources at a rate that exceeds the sustainable level by about 30% and that this will rise to about 50% by mid century. This can't continue. As mentioned above, when a society consumes more than the environment can provide in the short term, it starves eventually. The developed nations are still operating using a neo-colonial framework. They continue to steal from the weak states and support this theft by actual militarism and intimidation. This may work over the near term, but pollution is a world-wide issue and non-renewable resources will run out. Making the weaker areas suffer more can only delay the problem for awhile.

Perhaps that's the plan, people alive today depend upon the neo-colonial military framework to push the problems into the future when they won't be around to see the eventual breakdown. From the point of view of classical economics this is completely "rational". Each person is supposed to maximize their own welfare, the future be damned. If there is a way to alter this mindset I don't know what it is.